War 'would mean biggest oil shock ever'
Faisal Islam, economics correspondent
Sunday February 2, 2003
The world will suffer a bigger oil crisis than that during the Arab-Israeli conflict of 1973 if the US declares war on Iraq, according to leading US investment bank Goldman Sachs.
'The combined effect of Venezuelan and Iraqi disruptions has the potential to be the biggest shock in oil market history, even allowing for offsetting supply increases by other players,' says Gold man's respected analyst Jim O'Neill.
Crude oil prices of $31.10 per barrel - a two-year high - do not include any war premium, says the team. It argues that tight supply conditions, small inventories, and severe capacity constraints will see the price soar.
'A war could drive crude oil prices up by an additional $10-$15, or 30 to 50 per cent [to $46],' says Goldman's report, 'More Perfect Storm than Desert Storm'.
The oil market is currently factoring in a far more benign outlook for oil prices, based on the experience of a rapid drop in prices as soon as US air strikes on Iraq began in 1991. But Goldman points out that there is less excess production capacity now, and that the market is overconfident in the capacity of strategic reserves to bring oil prices down. Use of strategic reserves may dampen near-term prices but will 'prolong price pressures', says the report.
Low global oil stocks and reduced exports from strike-torn Venezuela have boosted prices by more than 30 per cent since late November. The Venezuelan 'outage' has cost 125 million barrels of production, already the fifth biggest supply shock in history, 'which almost entirely explains the current high level of prices'.
If the strike continues for two months and an Iraq war lasts a similar time, the cumulative outage will be 600 million barrels, far more than the 400 million taken off the market in the Arab-Israeli war.